Observations focused on the problems of an underdeveloped country, Venezuela, with some serendipity about the world (orchids, techs, science, investments, politics) at large. A famous Venezuelan, Juan Pablo Perez Alfonzo, referred to oil as the devil's excrement. For countries, easy wealth appears indeed to be the sure path to failure. Venezuela might be a clear example of that.

Archive for April 2nd, 2010

Today Chavez had a couple of visitors, one a beggar, Evo Morales from the Bolivian altiplano, the other one a stranger bearing expensive gifts, Vladimir Putin, from the cold steppes of Russia. Evo was probably taking advantage of Putin’s visit, wondering if in the multi-billion dollar discussions between Hugo and Vladimir, he could squeeze a few million out of his buddy. Vladimir, trying to seal deals and get commitments out of Hugo for weapons and useless trinkets, before Hugo’s money runs out.

Although the more cynical observers suggest that Vladimir came to seal deals precisely because the money is running out. They figure that Vladimir wants oil fields in exchange for trinkets like weapons and power plants, while the oil fields will become Russian property when and if the money runs out. At the same time Vladimir can play world politics, playing buddies with Hugo, making Obama and Hillary cringe.

So, while Chavez and the incompetents surrounding him can’t provide the most basic services to the population, the Russians claimed Venezuela would buy 50 war planes from them, while Hugo signed an agreement for cooperation on space exploration, a $20 billion investment in the Orinoco Oil belt and, of course, how could I have left it for last, Chavez’ dream of having nuclear energy now that he seems to have screwed up all of the country’s power system.

But unless oil prices shoot up to the stratosphere that Chavez wants to help explore, money seems to be getting very short around here, so when Chavez talks about a US$ 20 billion investment in the Junin field, he seems to forget that since by law (his new laws!) PDVSA has a minimum of 60% of all these projects, PDVSA has to come up somehow for its US$ 12 billion in this project and you have to add the Carabobo projects, all of the electric power plant investment needed now (smaller oil exports!). a possible setback in arbitration for expropriating oil and cement projects and, of course, funding all his entitlement projects. (Imagine Chavez telling Evo: Please don’t interrupt, we are talking billions here, so, yes you can have your $125 million, but please shut up Evo)

Because besides the “needs” above, there are signs that money, particularly dollars are not as easily found around the Venezuelan Government as it used to be. The first sign was the January devaluation, while expected, that Chavez would allow a 100% devaluation for most important items took many (all?) by surprise. Other signs have followed: The slide in the swap rate, the 15% decrease in international reserves, the slower outflows from CADIVI despite the higher exchange rate and even Chavez’ lower number of trips abroad.

And I have to wonder if Chavez was shown the somewhat gloomy projections by Morgan Stanley (Thanks to the reader who got me a copy!) in their latest report on Venezuela (Maybe Evo came because he saw them). These are the darkest predictions I have seen so far for the balance of foreign currency in Venezuela in the upcoming years:

The graphs are the result of modeling the country’s dollar balance using the trends in import growth, capital flight, oil output decline, rising local oil consumption using the future oil prices as predicted by the oil futures market. Then, there are two scenarios: In the “severe” scenario” (Top graph), the projection is made using the trends of the last three years, In the benign scenario (Bottom graph), they use the trends of the last twelve years.

In each scenario there are two projections, which reflect simply whether the Carabobo projecst will or not contribute to the dollar balance before 2015. (Note that the first step after the two fields were assigned was not complied with, contracts were supposed to have been signed last week, they weren’t. Apparently the Government is not complying with any of the changes it offered to make in the contracts before the auction took place)

As you can see the dollar balance deteriorates fast in both scenarios, reaching -US$ 180 million by 2015 in the “severe” scenario and -US$ 100 billion in 2013 in the “benign” one. In fact, there is little difference in the overall trend in either case, what changes is how fast they develop. In the severe case, there is a net deficit of US$ 5-10 billion by the end of this year, while in the benign case it only happens in 2011. Thus, the problem is the prediction, the time scale is irrelevant given the numbers. The point is that in both, Venezuela would have to find some US$ 60 billion in financing sometime between 2011 and 2013. At Bs. 4.3 per dollar this implies increasing the country’s debt to an amount roughly like the GDP of Venezuela, a Greece-like number that seems far-fetched to fulfill.

Thus, Chavez should land soon on his true reality that he can’t even meet his local expenses, let alone fancy-schmanzy space and nuclear power projects which would cost billions under his command.

But Vladimir, Evo and yes, Fidel and Ramiro, will take whatever they can get until someone tells Hugo that he is in deep…trouble.